How does a vendor take-back work?
The buyer pays most of the price at closing, often using a bank loan and their own money. The seller receives a promissory note for the rest, which the buyer repays over an agreed term.
Example: on a $3 million sale, the buyer pays $2.4 million at closing. The seller takes back a $600,000 note, repaid with interest over four years.
Why do buyers ask for it?
Banks lend based on what the business's earnings can repay. When the bank won't cover the full gap, a VTB fills it. It also shows the buyer that the seller believes the business will keep performing.
What are the risks for the seller?
If the buyer struggles, you may not be paid in full. The bank usually gets paid first, so your note often ranks behind it.
Ways to reduce the risk:
- Keep the VTB to a portion of the price you could live without if things went wrong.
- Get security, such as a general security agreement or a personal guarantee.
- Agree on interest, payment dates and what happens if payments are missed.
- Check the buyer's experience and finances carefully.
How is a VTB taxed in Canada?
If part of your sale price is paid over time, you may be able to claim a capital gains reserve. This spreads the taxable gain over up to five years, with at least 20% of the gain included each year. Confirm the details with your CPA.
Frequently asked questions
What is a vendor take-back in a business sale?
A vendor take-back is when the seller lends the buyer part of the purchase price and is repaid over time, usually with interest. It helps buyers who can't borrow the full amount from a bank.
Is vendor financing risky for the seller?
Yes, there is risk. If the business struggles after the sale, the buyer may not repay in full, and the bank is usually paid first. Security, clear terms and checking the buyer carefully reduce the risk.
How is vendor take-back financing taxed in Canada?
Sellers may be able to claim a capital gains reserve, spreading the taxable gain over up to five years, with at least 20% included each year. A CPA should confirm how it applies to your sale.
